Public Economics and Government

Public Economics

• Studies government intervention in the economy, analyzing how policy affects individuals and resource allocation.
• Provides a framework for determining the need for public intervention in the market.

Political Economy

• Lies at the boundary of Political Science and Economics.
• Concerned with collective choice, conflict, and institutions, and how the political environment affects economic outcomes.

Government Views

• Organic view: considers government as the heart of society, with individuals being parts of a natural organism.
• Mechanistic view: views government as created by individuals for individuals.

Role of Government

• Size of government can be measured by annual expenditures, such as purchases, transfers, and interest payments.
• Budget documents include unified budgets (itemized list of revenues and expenditures) and regulatory budgets (economic costs of government regulations).

Role of Theory

• Economic models provide frameworks for thinking about factors influencing behavior and generate hypotheses for empirical testing.
• Virtue of simplicity: reducing problems to their essentials.

Empirical Analysis

• Used to test hypotheses, focusing on correlation vs. causation.
• Conditions for government action X to cause societal effect Y:
  • X must precede Y
  • X and Y must be correlated
  • Other explanations for observed correlation must be eliminated

Experimental Studies

• Randomly assign subjects to treatment or control groups to study the effects of an intervention.
• Randomization improves the chances of similar characteristics between groups.

Pitfalls of Experimental Studies

• Ethical issues
• Technical problems
• Response bias
• Impact of limited duration
• Generalization of results to other populations, settings, and treatments

Observational Studies

• Rely on observed data, not obtained from experimental studies.
• Sources of observational data: surveys, administrative records, and governmental data.
• Econometrics: statistical techniques to establish and estimate causal relationships in absence of randomization.

Types of Observational Studies

• Cross-sectional data: information on individual entities at a given point in time.
• Time-series data: information on a single entity at different points in time.
• Panel (longitudinal) data: combines features of both.

Pitfalls of Observational Studies

• Data collected in non-experimental setting
• Difficult to ensure a valid "counterfactual"
• Specification issues: not all variables are available or measurable.

Positive and Normative Theory

• Positive Theory: explains the causes of an economic phenomenon.
• Normative Theory: states what should be done to reach certain results.

Economic Policy Model

• Controllable if the political authority can pursue its objectives.
• Goals can be fixed or flexible.
• The golden rule of Tinbergen (1966): the number of instruments available to the policymaker must be at least equal to the number of objectives.

Welfare Economics

• Concerned with the social desirability of alternative economic states.
• Composed of different streams of research, including old and new welfare economics.
• Focuses on individual satisfaction (utility) and wellbeing, studying how market structures and resource allocation affect overall well-being.

Efficiency

• "Getting the most out of the resources used."
• Pareto Efficiency: a particular sort of efficiency, where it is impossible to increase an individual's utility without worsening that of at least another.

This quiz covers the basics of public economics, political economy, and government views, including the role of government intervention in the economy and its impact on resource allocation.